One2One Communications v. , 805 F.3d 428 ( 2015 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 13-3410
_____________
In re: ONE2ONE COMMUNICATIONS, LLC,
Debtor
QUAD/GRAPHICS, INC.,
Appellant
_____________
APPEAL FROM THE UNITED STATES DISTRICT
COURT FOR THE DISTRICT OF NEW JERSEY
(D.C. Civ. Action No. 2-13-cv-01675)
District Judge: Honorable Jose L. Linares
Argued: October 29, 2014
_________________
Before: MCKEE, Chief Judge, GREENAWAY, JR., and
KRAUSE, Circuit Judges.
(Filed: July 21, 2015)
Courtney A. Schael, Esq. (Argued)
Ashford Schael
1371 Morris Avenue
Union, NJ 07083
Timothy F. Nixon, Esq.
Godfrey & Kahn
333 Main Street
Suite 600, P.O. Box 13067
Green Bay, WI 54307
Attorneys for Appellant
Michael D. Sirota, Esq. (Argued)
David M. Bass, Esq.
Cole Schotz
25 Main Street
Court Plaza North, P.O. Box 800
Hackensack, NJ 07601
Joseph DiPasquale, Esq.
Henry M. Karwowski, Esq.
Richard D. Trenk, Esq.
Trenk, DiPasquale, Della Fera & Sodono
347 Mount Pleasant Avenue
Suite 300
West Orange, NJ 07052
Attorneys for Debtor
Kenneth A. Rosen, Esq.
Lowenstein Sandler
65 Livingston Avenue
2
Roseland, NJ 07068
Attorney for the Official Committee of Unsecured
Creditors, Defendant
Martha R. Hildebrandt, Esq.
Office of United States Trustee
One Newark Center
Suite 2100
Newark, NJ 07102
Attorney for the Office of United States Trustee
__________________
OPINION
__________________
GREENAWAY, JR., Circuit Judge.
Appellant Quad/Graphics Inc. appeals from the
judgment of the District Court affirming the Bankruptcy
Court’s confirmation of One2One Communications, LLC’s
(the “Debtor”) Chapter 11 plan of reorganization and
dismissing Appellant’s bankruptcy appeal as equitably moot.
Appellant contends that the District Court abused its
discretion in dismissing its appeal as equitably moot.
Appellant also asks us to use this appeal to overrule our
adoption of equitable mootness in In re Continental Airlines,
91 F.3d 553, 560 (3d Cir. 1996) (en banc) (‘‘Continental’’),
contending that the doctrine is unconstitutional and contrary
to the Bankruptcy Code. Continental remains the law of this
circuit. This panel is not free to overturn a precedential
3
opinion. In the absence of an en banc reversal, we are bound
by Continental. Because the District Court abused its
discretion under Continental, we will reverse the District
Court’s judgment and remand for consideration of the merits
of Appellant’s bankruptcy appeal.
I. Background
The Debtor, a billing services technology company, is
a limited liability business and its sole member is Joli, Inc.
Joanne Heverly owns seventy-five percent of Joli, Inc., and
Richard Brammer, a former officer of the Debtor, owns the
remaining twenty-five percent. Appellant, a printing
company, holds the single largest claim against the Debtor
and the Debtor’s CEO, Bruce Heverly, husband of Joanne
Heverly, for $9,359,630.91, which stems from a judgment
entered in the District Court for the Eastern District of
Wisconsin.1 The Court of Appeals for the Seventh Circuit
has since affirmed that judgment. See Quad/Graphics, Inc. v.
One2One Commc’ns, LLC, 529 F. App’x 784, 793 (7th Cir.
2013).
The Debtor filed a voluntary petition for relief under
Chapter 11 of the United State Bankruptcy Code, 11 U.S.C. §
101 et seq. (the “Bankruptcy Code”), in the Bankruptcy Court
for the District of New Jersey (the “Bankruptcy Court”).
Thereafter, the Office of the United States Trustee formed an
official unsecured creditors committee (the “Committee”)
1
The Debtor’s unsecured claims, not including
Appellant’s claim, total less than $1.3 million.
4
consisting of Appellant, Ricoh Production Print Solutions,
LLC, and Enterprise Group.
Between September 2012 and January 2014, the
Debtor filed the First,2 Second, and Third Amended Plans of
Reorganization. After the Bankruptcy Court denied
confirmation of the First Amended Plan of Reorganization,
Bela Szigethy (“Szigethy”) agreed to make an investment in
the Debtor.3 The Debtor filed a Fourth Amended Plan of
Reorganization (the “Plan”) on January 25, 2013, under
which a third-party, One2One Holdings, LLC (“Plan
Sponsor”) would acquire a membership interest in the Debtor.
The Plan incorporated a Plan Support Agreement which
provided the Plan Sponsor with the exclusive right to
purchase 100% of the Debtor’s equity for $200,000. Neither
the Plan Sponsor nor any third-party was to contribute any
additional capital to fund the Plan. The Plan also
incorporated the terms of the Committee Agreement with
respect to distributions and the waiver of preference actions
against unsecured creditors.
2
The First Amended Plan incorporated an agreement
with the Committee (the “Committee Agreement”) providing
for: (i) a distribution to unsecured creditors of $1.25 million
over seven years, (ii) a non-compete clause binding the
Heverlys and their relatives until all payments were made to
unsecured creditors, and (iii) waiver of preference actions
against unsecured creditors.
3
Szigethy is the founder, co-owner, and Co-CEO of
The Riverside Company, a global private equity firm holding
over $3 billion in assets.
5
On March 5, 2013, after holding a five-day
confirmation hearing, and over the objection of Appellant,
Bankruptcy Judge Winfield entered an order (the
“Confirmation Order”) confirming the Plan.4 The
Confirmation Order was automatically stayed for fourteen
days pursuant to Federal Rule of Bankruptcy Procedure
3020(e). Appellant moved for a stay pending appeal, which
was denied. The Bankruptcy Court also denied a request by
the Debtor to shorten the automatic fourteen-day stay.5 The
parties briefed the merits of the appeal, but the District Court
4
Appellant, the sole objector to the Plan, opposed
confirmation on the basis that, inter alia, the Plan violated the
absolute priority rule under 11 U.S.C. § 1129(b) by allowing
equity holders to retain property without paying unsecured
creditors in full.
5
On March 18, 2013, Appellant filed Notices of
Appeal from the Bankruptcy Court’s Confirmation Order and
the Bankruptcy Court’s Order denying Appellant’s motion for
a stay pending appeal. On March 19, 2013, the final day of
the automatic stay, Appellant filed an emergency application
pursuant to Federal Rule of Bankruptcy Procedure 8005
seeking to temporarily stay the Confirmation Order, and
requesting that the Court order appellees to show cause as to
why a stay pending appeal should not issue. Once the District
Court denied its application, Appellant appealed that decision
to the Third Circuit, which upheld the denial of the stay.
Appellant subsequently sought injunctive relief from the
District Court, which was denied pursuant to the law of the
case doctrine.
6
never reached those issues, as it granted the Debtor’s motion
to dismiss the appeal as equitably moot on June 24, 2013.
II. Jurisdiction and Standard of Review
The Bankruptcy Court had jurisdiction under 28
U.S.C. § 157(b). The District Court had jurisdiction under 28
U.S.C. § 158(a). We have jurisdiction under 28 U.S.C. §§
158(d) and 1291.
We review for abuse of discretion a district court’s
decision that a bankruptcy appeal is equitably moot.
Continental, 91 F.3d at 560.
III. Analysis
a. Appellant’s Challenge to the Equitable
Mootness Doctrine
As an initial matter, Appellant asserts that the
equitable mootness doctrine is unconstitutional and contrary
to the Bankruptcy Code. Because we have already approved
the doctrine of equitable mootness in Continental,6 only the
6
It should be noted that nearly all of the other Courts
of Appeals with jurisdiction to hear bankruptcy appeals have
endorsed some form of the equitable mootness doctrine. See
In re Healthco Int’l, Inc., 136 F.3d 45, 48 (1st Cir. 1998); In
re Charter Commc’ns, Inc., 691 F.3d 476, 481 (2d Cir. 2012);
Behrmann v. Nat’l Heritage Found., 663 F.3d 704, 713–14
(4th Cir. 2011); In re Scopac, 624 F.3d 274, 281–82 (5th Cir.
2010); In re Am. HomePatient, Inc., 420 F.3d 559, 563–65
(6th Cir. 2005); In re UNR Indus., Inc., 20 F.3d 766, 769 (7th
7
Court sitting en banc would have the authority to reevaluate
our prior holding. See United States v. White, 748 F.3d 507,
512–13 (3d Cir. 2014).7 This Court may only decline to
follow a prior decision of our Court without the necessity of
an en banc decision when the prior decision conflicts with a
Supreme Court decision. See Chester ex rel. N.L.R.B. v.
Grane Healthcare Co., 666 F.3d 87, 94 (3d Cir. 2011); see
also Morrow v. Balaski, 719 F.3d 160, 179 (3d Cir. 2013) (en
banc) (Smith, J., concurring) (“‘[E]ven in constitutional
cases’ . . . , the doctrine of stare decisis ‘carries such
persuasive force’ that departing from it has ‘always required’
some ‘special justification.’”) (quoting Arizona v. Rumsey,
467 U.S. 203, 212 (1984)).
Cir. 1994); In re Thorpe Insulation Co., 677 F.3d 869, 879–
83 (9th Cir. 2012); In re Paige, 584 F.3d 1327, 1337–38 (10th
Cir. 2009); In re Lett, 632 F.3d 1216, 1225–26 (11th Cir.
2011); In re AOV Indus., Inc., 792 F.2d 1140, 1147–48 (D.C.
Cir. 1986). The Eighth Circuit has yet to address the merits
of the doctrine’s applicability in a precedential opinion.
Compare In re Nevel Props. Corp., 765 F.3d 846, 848 & n.3
(8th Cir. 2014) (affirming on the merits and denying as moot
appellee’s motion to dismiss the appeal as equitably moot),
with In re President Casinos, Inc., 409 F. App’x 31, 31–32
(8th Cir. 2010) (per curiam) (affirming district court’s
dismissal of bankruptcy appeal as equitably moot).
7
See also 3d Cir. I.O.P. 9.1 (2010) (“[N]o subsequent
panel overrules the holding in a precedential opinion of a
previous panel. Court en banc consideration is required to do
so.”).
8
Appellant argues that our equitable mootness
jurisprudence should be reevaluated in light of the Supreme
Court’s decision in Stern v. Marshall, 131 S. Ct. 2594 (2011).
Appellant contends that after Stern, a bankruptcy court’s
ability to enter binding, final judgments in “core” bankruptcy
proceedings—like plan confirmations—must be subject to
district court review on appeal under traditional appellate
standards. Stern alone does not permit us to depart from
Continental.
In Stern, the Supreme Court granted certiorari to
resolve the question of whether 28 U.S.C. § 157(b)(2)(C) is
unconstitutional because it gives non-Article III judges the
power to render final judgments on common law compulsory
counterclaims that are not necessarily resolved in the process
of allowing or disallowing the defendant’s proof of claim.
The Court in Stern found that the provision unconstitutionally
delegated the judicial power of the United States to non-
Article III bankruptcy judges. Justice Roberts’s opinion
relied heavily on Murray’s Lessee v. Hoboken Land &
Improvement Co., 59 U.S. 272, 284 (1855), which stated that
with the exception of certain “public rights,” Congress cannot
“withdraw from judicial cognizance any matter which, from
its nature, is the subject of a suit at common law, or in equity,
or admiralty.” Because the counterclaim at issue in Stern was
a tort claim at common law, the Court held that “[t]he
Bankruptcy Court below lacked the constitutional authority to
enter a final judgment on [this] state law counterclaim.”
Stern, 131 S. Ct. at 2620.
Thus, the Court in Stern made clear that non-Article III
bankruptcy judges do not have the constitutional authority to
adjudicate a claim that is exclusively based upon a legal right
grounded in state law despite appellate review of the
9
bankruptcy judge’s decision by an Article III judge.
However, Stern did not consider the authority of bankruptcy
judges to make final determinations regarding other kinds of
claims and counterclaims brought by debtors and creditors,
nor did Stern consider whether Article III requires appellate
review of a bankruptcy judge’s decisions by an Article III
judge. Accordingly, we are obligated to apply this Court’s
equitable mootness doctrine notwithstanding Stern.
b. Equitable Mootness Analysis
Following confirmation of a reorganization plan by a
bankruptcy court, an aggrieved party has the statutory right to
appeal the court’s ruling. Once a bankruptcy appeal has been
filed, federal courts have a ‘‘‘virtually unflagging
obligation’’’ to exercise the jurisdiction conferred on them.
In re Semcrude, L.P., 728 F.3d 314, 320 (3d Cir. 2013)
(quoting Colo. River Water Conservation Dist. v. United
States, 424 U.S. 800, 817 (1976)). Before there is a basis to
avoid deciding the merits of an appeal, we must first
determine that granting the requested relief is almost certain
to produce a ‘‘perverse’’ outcome— significant ‘‘injury to
third parties’’ and/or ‘‘chaos in the bankruptcy court’’ from a
plan in tatters. In re Phila. Newspapers, LLC, 690 F.3d 161,
168 (3d Cir. 2012). Only in such circumstances is equitable
mootness a valid consideration.
A court decides to dismiss an appeal as equitably moot
through the consideration of the following ‘‘prudential’’
factors:
(1) whether the reorganization plan has been
substantially consummated, (2) whether a stay
has been obtained, (3) whether the relief
10
requested would affect the rights of parties not
before the court, (4) whether the relief requested
would affect the success of the plan, and (5) the
public policy of affording finality to bankruptcy
judgments.
Id. (citing Continental, 91 F.3d at 560). Depending on the
circumstances, each factor is given varying weight. Id.
(citing In re PWS Holding Corp., 228 F.3d 224, 236 (3d Cir.
2000)).
These factors are interconnected and overlapping.
Semcrude, 728 F.3d at 320 (citing Phila. Newspapers, 690
F.3d at 168–69). ‘‘The second factor principally duplicates
the first in the sense that a plan cannot be substantially
consummated if the appellant has successfully sought a stay.’’
Phila. Newspapers, 690 F.3d at 169 (internal quotation marks
omitted). In analyzing the first factor, courts have considered
‘‘whether allowing an appeal to go forward will undermine
the plan, and not merely whether the plan has been
substantially consummated under the Bankruptcy Code’s
definition.’’8 Id. at 168–69. This collapses the first and
8
Substantial consummation is defined in the Bankruptcy
Code to mean the
(A) transfer of all or substantially all of the property
proposed by the plan to be
transferred;
(B) assumption by the debtor or by the successor to the
debtor under the plan of the business or of the
management of all or substantially all of the property
dealt with by the plan; and
11
fourth factors. The third factor adds an additional
consideration—whether granting relief will undermine ‘‘the
reliance of third parties, in particular investors, on the finality
of the transaction.’’ Id. at 169 (internal quotation marks
omitted). ‘‘Finally, the fifth factor supports the other four by
encouraging investors and others to rely on confirmation
orders, thereby facilitating successful reorganizations by
fostering confidence in the finality of confirmed plans.’’ Id.
Taken together, these factors require that the equitable
mootness doctrine be applied only to “prevent[] a court from
unscrambling complex bankruptcy reorganizations when the
appealing party should have acted before the plan became
extremely difficult to retract.” Nordhoff Invs., Inc. v. Zenith
Elecs. Corp., 258 F.3d 180, 185 (3d Cir. 2001). The party
seeking dismissal bears the burden to demonstrate that,
weighing the relevant factors, dismissal is warranted.
Semcrude, 728 F.3d at 321.
In practice, equitable mootness proceeds in two
analytical steps: “(1) whether a confirmed plan has been
substantially consummated; and (2) if so, whether granting
the relief requested in the appeal will (a) fatally scramble the
plan and/or (b) significantly harm third parties who have
justifiably relied on the plan’s confirmation.” Id.
“Satisfaction of [the] statutory standard indicates that
implementation of the plan has progressed to the point that
turning back may be imprudent.” Id.
(C) commencement of distribution under the plan.
11 U.S.C. § 1101.
12
If the confirmed plan has been substantially
consummated, a court should next determine whether
granting relief will require undoing the plan as opposed to
modifying it in a manner that does not cause its collapse. See
In re Zenith Elecs. Corp., 329 F.3d 338, 346–47 (3d Cir.
2003) (appeal not equitably moot where disgorgement of
professional fees would not unravel plan); United Artists
Theatre Co. v. Walton, 315 F.3d 217, 228 (3d Cir. 2003)
(appeal not equitably moot where striking indemnification
provision would leave the plan otherwise intact); PWS, 228
F.3d at 236 (appeal not equitably moot where plan could go
forward even if certain releases were stricken). A court
should also consider the extent a successful appeal, by
altering the plan or otherwise, will harm third parties who
have acted reasonably in reliance on the finality of plan
confirmation. Semcrude, 728 F.3d at 321.
c. Application of the Equitable Mootness
Doctrine
Since this Court’s adoption of the equitable mootness
doctrine in Continental, we have emphasized that the doctrine
must be construed narrowly and applied in limited
circumstances. In Philadelphia Newspapers, this Court
emphasized “that a court only should apply the equitable
mootness doctrine . . . ‘[in] complex bankruptcy
reorganizations when the appealing party should have acted
before the plan became extremely difficult to retract.’” 690
F.3d at 169 (quoting Nordhoff, 258 F.3d at 185). “The
doctrine is quite rightly ‘limited in scope’ and ‘cautiously
applied.’” Id. (quoting Continental, 91 F.3d at 559). Further,
the doctrine’s “judge-made origin, coupled with the
responsibility of federal courts to exercise their jurisdictional
mandate, obliges us . . . to proceed most carefully before
13
dismissing an appeal as equitably moot.” Semcrude, 728 F.3d
at 318.
Our prior dismissals pursuant to the equitable
mootness doctrine are inapposite here. Those prior
applications of the doctrine involved complex bankruptcy
reorganizations that included multiple related debtors,
hundreds of millions of dollars in assets, liabilities and
claims, and hundreds or thousands of creditors. For example,
Continental involved the merger of fifty-three debtors with
Continental, a $110 million investment in the reorganized
debtor, the transfer by foreign governments of route
authorities, and the assumption of leases and executory
contracts worth over five billion dollars. 91 F.3d at 567.
Similarly, in Nordhoff, the reorganization plan required
eighteen months of preparation between several parties, the
exchange of over $100 million in bonds, the issuance of new
stock, the extension of a sixty million dollar credit facility,
and the exchange and cancellation of over $100 million of
debt. 258 F.3d at 182, 186.
In contrast here, the Debtor’s reorganization involved
a $200,000 investment in the reorganized debtor and only one
secured creditor that held a blanket lien on the Debtor’s assets
for less than $100,000. Further, the Debtor had only
seventeen unsecured creditors, not including insiders. In
addition, the Plan did not provide for new financing, mergers
or dissolutions of entities, issuance of stock or bonds, name
change, change of business location, change in management
or any other significant transactions. The record illustrates
that this case did not involve a sufficiently complex
bankruptcy reorganization such that dismissal on the basis of
equitable mootness would be appropriate.
14
Consideration of the prudential factors also
demonstrates that the District Court abused its discretion.
The District Court found that the Plan was substantially
consummated. The Debtor transferred all property required
to be transferred on or shortly after the effective date of the
Plan, and the reorganized debtor commenced distributions
under the Plan. See 11 U.S.C. § 1101(2)(C) (requiring only
the “commencement of distribution under the plan”). The
District Court observed that Appellant failed to obtain a stay.
We do not dispute those determinations. However, the
District Court also found that granting relief to Appellant
would lead to a perverse outcome by causing the Plan to be
fully unraveled, resulting in significant harm to third parties.
We disagree. In our judgment, the proper application of the
prudential factors does not permit dismissal on equitable
mootness grounds.
As noted, the first and fourth prudential factors require
that a court consider whether allowing an appeal to go
forward will undermine the plan. Semcrude, 728 F.3d at 321.
In finding that these factors weigh in favor of equitable
mootness, the District Court found that Appellant “offered no
options which would allow the Court to grant it relief without
[unscrambling the Plan] entirely.” In re One 2 One
Commc’ns, LLC, No. 13-1675, 2013 WL 3864056, at *6
(D.N.J. July 24, 2013). In reaching this conclusion, the
District Court erred in two fundamental respects: it placed
the burden on Appellant to demonstrate that this factor
weighed in its favor, and it concluded that because granting
Appellant’s requested relief would reverse the Plan, this
factor necessarily favored the Debtor.
To the contrary, it was the Debtor’s burden, as the
party seeking dismissal, to demonstrate that the prudential
15
factors weighed in its favor. See Semcrude, 728 F.3d at 321.
Further, courts are obligated to consider not only whether
granting the requested relief would require reversal of the
plan, but also whether the plan could be retracted without
great difficulty and inequity. See Nordhoff, 258 F.3d at 186.
We have noted in prior cases that reversal of a confirmation
order is more likely to lead to an inequitable result “where the
reorganization involves intricate transactions or where outside
investors have relied on the confirmation of the plan.”
Continental, 91 F.3d at 560–61 (citations omitted); see also
Nordhoff, 258 F.3d at 186 (finding that plan that involved
hundreds of millions of dollars, the issuance of unretractable
bonds, and restructuring the debt, assets, and management of
a major corporation “could [not] be reversed without great
difficulty and inequity”). We have most frequently found that
a plan could not be retracted when the reorganized debtor
issued publically traded debt or securities. See, e.g.,
Nordhoff, 258 F.3d at 186.
Here, the Plan did not involve intricate transactions
and the Debtor did not present sufficient evidence that the
Plan would be difficult to unravel. Instead, the Debtor
identified various post-confirmation transactions entered into
in the ordinary course of the reorganized Debtor’s business.
These routine transactions, including the investment by the
Plan Sponsor, the commencement of distributions, the hiring
of new employees and entering into various agreements with
existing and new customers are likely to transpire in almost
every bankruptcy reorganization where the appealing party is
unsuccessful in obtaining (or fails to seek) a stay. Further, the
Plan did not involve the issuance of any publicly traded
securities, bonds, or other circumstances that would make it
difficult to retract the Plan. Accordingly, the District Court
16
abused its discretion in finding that the first and fourth factors
favored the Debtor.
Furthermore, under the third factor, “the reliance by
third parties, in particular investors, on the finality of the
[Plan’s confirmation]” is minimal. Continental, 91 F.3d at
562. The District Court articulated no specific harm that
would inure to the detriment of third parties and instead stated
that, “One2One argues that the relief Appellant seeks would
unravel the Plan in its entirety and call into question the
continued viability of One2One to the detriment of third
parties.” One 2 One Commc’ns, 2013 WL 3864056, at *8.9
However, as the District Court noted, “[t]his is not a case
where a debtor issued publicly traded securities or debt
pursuant to a plan that third parties to the bankruptcy case
could have purchased on the open market.” Id. at *7
(alteration in original) (internal quotation marks omitted).
Nevertheless, the Debtor now argues that allowing
Appellant’s appeal to be heard on the merits would inevitably
affect the rights of parties not before the court such as
creditors, employees, and third-party workers.
This type of minimal third-party reliance is present in
nearly all bankruptcy reorganizations and cannot be
characterized as almost certain to cause significant injury to
9
Indeed, the Debtor concedes on appeal that the risk of
harm is speculative: “granting the Appellant’s requested relief
would potentially jeopardize the Reorganized Debtor’s
successful emergence from chapter 11 and seriously threaten
the viability of its ongoing business.” Appellee’s Br. 42
(quoting App. 3161) (internal quotation marks omitted).
17
third parties. Cf. Continental, 91 F.3d at 556 (emphasizing
that the record was replete with evidence that investing
parties not before the court relied on the confirmation order in
making decision to enter into a $450 million investment
agreement under a complex arrangement). In light of the
limited evidence of potential third-party injury, the District
Court also abused its discretion in determining that this factor
favored the Debtor.
Finally, the prudential consideration of public policy
weighs in favor of providing Appellant with appellate review
of its bankruptcy appeal. “Though the finality of the
Bankruptcy Court’s decision necessarily will be disturbed,”
this Court has recognized an appealing party’s “statutory right
to review of the [Bankruptcy] Court’s decision.” Phila.
Newspapers, 690 F.3d at 171. Further, “[t]he presumptive
position remains that federal courts should hear and decide on
the merits cases properly before them.” Semcrude, 728 F.3d
at 326.
Here, Appellant has repeatedly advanced the
contention that it is entitled to appellate review. Appellant
objected to the Plan, applied for a stay, filed an appeal of the
Confirmation Order and sought emergency appellate review.
In light of the other prudential factors, denying Appellant
review now would be distinctly inequitable.10
10
Appellant also argues on appeal that the District
Court abused its discretion by dismissing its appeal of the
third-party releases in the Plan. In light of our finding that the
District Court abused its discretion in dismissing Appellant’s
18
IV. Conclusion
Absent en banc reconsideration, we cannot entertain
Appellant’s challenge to equitable mootness, as Continental
remains the law of this circuit. Because the District Court
abused its discretion under Continental, we will reverse the
District Court’s dismissal and remand for its consideration of
Appellant’s bankruptcy appeal on its merits.
entire appeal as equitably moot, we need not consider
Appellant’s separate argument as to the third-party releases.
19
In re: One2One Communications, LLC, No. 13-3410
KRAUSE, Circuit Judge, concurring:
I agree wholeheartedly with the majority’s equitable
mootness analysis, which we are compelled to undertake
under our controlling precedent. I write separately, however,
because I do not believe we should persist in our failed
attempts to cabin this legally ungrounded and practically
unadministrable “judge-made abstention doctrine.” In re
Semcrude, L.P., 728 F.3d 314, 317 (3d Cir. 2013). Rather,
the time has come to reconsider whether it should exist at all,
and, if we conclude it should, to reform it substantially.
Although we adopted equitable mootness en banc in In
re Continental Airlines, 91 F.3d 553 (3d Cir. 1996) (en banc),
neither the constitutional nor the statutory basis for the
doctrine were challenged in that case, and the Court was still
nearly evenly divided—with then-Judge Alito leading the
dissent. See id. at 568 (Alito, J., dissenting). The doctrine
was designed to be “limited in scope and cautiously applied,”
specifically in highly complex cases where limited relief was
not feasible and upsetting a reorganization would cause
substantial harm to numerous third parties. Id. at 559
(majority opinion). In the nearly twenty years since we
launched that experiment, it has proved highly problematic,
with district courts continuing to dismiss appeals in the
simplest of bankruptcies. Further, as courts and litigants
(including Appellees) have struggled to identify a statutory
basis for the doctrine, it has become painfully apparent that
there is none. Moreover, a series of Supreme Court decisions
since our adoption of the doctrine makes clear that, whatever
doubts we set aside twenty years ago to embrace the doctrine,
it cannot survive constitutional scrutiny today. I therefore
urge our Court to consider eliminating, or at the very least,
reforming, equitable mootness.
I.
I begin with our experience with the doctrine.
Equitable mootness was intended to “provide[] a vehicle
whereby the court can prevent substantial harm to numerous
parties,” namely where “the reorganization involves intricate
transactions or where outside investors have relied on the
confirmation of the plan.” Cont’l Airlines, 91 F.3d at 559-60
(citations omitted). What Continental Airlines spawned is a
different species altogether. We have repeatedly admonished
that the doctrine applies only to attempts to “unscrambl[e]
complex bankruptcy reorganizations,” Nordhoff Invs., Inc. v.
Zenith Elecs. Corp., 258 F.3d 180, 185 (3d Cir. 2001)
(emphasis added),1 and even then “‘is limited in scope and
should be cautiously applied,’” id. (quoting In re PWS
Holding Corp., 228 F.3d 224, 236 (3d Cir. 2000)),2 as well as
that it is inapplicable when limited relief is available on
appeal, Semcrude, 728 F.3d at 323.3 Yet district courts have
1
See also In re Phila. Newspapers, 690 F.3d 161, 169
(3d Cir. 2012) (reciting Nordhoff Investments); In re Zenith
Elecs. Corp., 329 F.3d 338, 340 (3d Cir. 2003) (same).
2
See also Phila. Newspapers, 690 F.3d at 170 (reciting
the same proposition as stated in Cont’l Airlines); Zenith
Elecs. Corp., 329 F.3d at 343 (same).
3
See also Phila. Newspapers, 690 F.3d at 170; Zenith
Elecs. Corp., 329 F.3d at 346; United Artists Theatre Co. v.
Walton, 315 F.3d 217, 228 (3d Cir. 2003); PWS, 228 F.3d at
236.
2
continued to invoke the doctrine in modest, non-complex
bankruptcies and where appellants have sought limited relief.
We have also rejected invitations to extend equitable
mootness outside its intended context, i.e., appeals from
confirmation orders. See In re Diet Drugs, 582 F.3d 524, 552
n.55 (3d Cir. 2009) (declining to decide whether equitable
mootness applied to class settlement); id at 557 (Ambro, J.,
dissenting) (cautioning that extending “the controversial
doctrine of equitable mootness, which applies only to
attempts to unscrambl[e] complex bankruptcy
reorganizations,” to class settlement was inappropriate
(alteration in original) (internal quotation marks omitted)).
But our district courts have not been so discriminating. See
In re Jevic Holding Corp., Nos. 13-104 & 13-105, 2014 WL
268613, at *4 (D. Del. Jan. 24, 2014) (applying equitable
mootness to dismiss an appeal from an order approving a
settlement and structured dismissal). In fact, the doctrine has
even been invoked by bankruptcy courts to dismiss motions
to revoke reorganization plans. See, e.g., In re Innovative
Clinical Solutions, Ltd., 302 B.R. 136, 140-42 (Bankr. D. Del.
2003); cf. In re Machne Menachem, Inc., 371 B.R. 63, 73-75
(Bankr. M.D. Pa. 2006) (applying equitable mootness factors
but declining to dismiss on equitable mootness grounds).
Since Continental Airlines, we have reversed findings
of equitable mootness or declined to dismiss appeals as
equitably moot no less than seven times. See In re SCH
Corp., 569 F. App’x 119, 122 (3d Cir. 2014) (not
precedential) (reversing a finding of equitable mootness);
Semcrude, 728 F.3d 314 at 323 (same); Phila. Newspapers,
690 F.3d at 170 (same); Zenith Elecs. Corp., 329 F.3d at 346
(same); United Artists, 315 F.3d at 228 (declining to dismiss
as equitably moot an appeal from a district court exercising
3
original jurisdiction over a bankruptcy case); PWS, 228 F.3d
at 237 (same); In re Cont’l Airlines (Continental II), 203 F.3d
203, 210 (3d Cir. 2000) (declining to dismiss appeal as
equitably moot because the debtor had not preserved the
issue, but noting that equitable mootness did not apply).
This case is only the most recent example, but it
epitomizes the problem. As the majority explains, what we
have is a small, garden-variety bankruptcy. Quad’s appeal
did not implicate intricate transactions that would be difficult
to unravel, nor did it pose a significant risk of injuring third
parties. Further, in the event the Plan could not be undone,
Quad urged the District Court to grant the limited relief of
striking third-party releases from the Plan. The District Court
nonetheless dismissed Quad’s timely and repeated requests
for appellate review on “equitable mootness” grounds. That
yet another thoughtful and diligent District Judge has
misconstrued our case law as permitting the abdication of
jurisdiction in these circumstances reflects a doctrine adrift
and in need of reconsideration by our Court.
II.
So what is the constitutional or statutory anchor for
declining to exercise jurisdiction over bankruptcy appeals
dubbed “equitably moot”? Simply put, there is none.
The mandate that federal courts hear cases within their
statutory jurisdiction is a bedrock principle of our judiciary.
As Chief Justice Marshall wrote long ago, “[w]e have no
more right to decline the exercise of jurisdiction which is
given, than to usurp that which is not given. The one or the
other would be treason to the [C]onstitution.” Cohens v.
Virginia, 19 U.S. (6 Wheat.) 264, 404 (1821). Dismissing
4
appeals in the name of equitable mootness violates this
“virtually unflagging obligation of the federal courts to
exercise the jurisdiction given them.” Colo. River Water
Conservation Dist. v. United States, 424 U.S. 800, 817
(1976). Then-Judge Alito recognized as much in Continental
Airlines, rebuking the majority for “throw[ing] [the
appellants] out of court without reaching the merits of their
arguments . . . even though (a) th[e] case [was] clearly not
‘moot’ in any proper sense of the term, (b) we unquestionably
ha[d] statutory jurisdiction, and (c) we have a ‘virtually
unflagging obligation’ to exercise the jurisdiction that we
have been given.” Cont’l Airlines, 91 F.3d at 568 (Alito, J.,
dissenting) (quoting Colo. River, 424 U.S. at 817).
While we have referred to equitable mootness as a
“judge-made abstention doctrine,” Semcrude, 728 F.3d at
317, it is not among the handful of narrow and deeply rooted
abstention doctrines recognized by the Supreme Court,
namely, Pullman, Burford, Younger, and Colorado River.4
4
See Colo. River, 424 U.S. at 818 (abstaining from
hearing cases that are duplicative of a pending state
proceeding); Younger v. Harris, 401 U.S. 37, 49-54 (1971)
(abstaining from hearing cases that would interfere with a
pending state criminal proceeding); Burford v. Sun Oil Co.,
319 U.S. 315, 333-34 (1943) (abstaining where adjudication
in federal court would unduly intrude into the processes of
state government or undermine the state’s ability to maintain
desired uniformity); R.R. Comm’n of Tex. v. Pullman Co., 312
U.S. 496, 501 (1941) (abstaining from cases in which the
resolution of a federal constitutional question might be
obviated if the state courts were given the opportunity to
interpret ambiguous state law); see also Quackenbush v.
5
Those doctrines, much like the doctrine of forum non
conveniens, proceed from the premise that “[i]n rare
circumstances, federal courts can relinquish their jurisdiction
in favor of another forum.” Quackenbush v. Allstate Ins. Co.,
517 U.S. 706, 722 (1996) (emphasis added).5 Moreover, the
Supreme Court has “on several occasions explicitly
recognized that abstention ‘does not, of course, involve the
abdication of federal jurisdiction, but only the postponement
of its exercise.’” England v. La. State Bd. of Med. Exam’rs,
375 U.S. 411, 465 (1964) (emphasis added) (quoting
Harrison v. NAACP, 360 U.S. 167, 177 (1959)). But where
there is no other forum and and no later exercise of
jurisdiction, as in the case of equitable mootness,
relinquishing jurisdiction is not abstention; it’s abdication. In
short, there is no analogue for equitable mootness among the
abstention doctrines.
Nor is there a likely prospect of the Supreme Court
either taking an expansive view of an existing doctrine to
encompass equitable mootness or recognizing equitable
mootness as a wholly new abstention doctrine. On the
contrary, the Court has repeatedly endeavored to narrow the
scope of the abstention doctrines, particularly within the past
Allstate Ins. Co., 517 U.S. 706, 716-23 (1996) (explaining the
contours of the abstention doctrines).
5
See generally David L. Shapiro, Jurisdiction and
Discretion, 60 N.Y.U. L. Rev. 543, 548-57, 579-87 (1985)
(describing practices of judicial abstention sounding in
justiciability, comity, forum non conveniens, separation of
powers, and other principles and explaining that the range of
judges’ equitable discretion is affected by governing statutes).
6
few years. In Sprint Communications, Inc. v. Jacobs, 134 S.
Ct. 584 (2013), for instance, the Court refused to extend the
three “exceptional” situations where Younger abstention is
appropriate, reaffirming Chief Justice Marshall’s “early and
famous[]” assertion of federal courts’ obligation to hear and
decide cases within their jurisdiction. Sprint Commc’ns, 134
S. Ct. at 590-91 (citing Cohens, 6 Wheat. at 404). The Court
relied on that assertion again when declining to expand the
political question doctrine in Zivotofsky ex rel. Zivotofsky v.
Clinton, 132 S. Ct. 1421 (2012), explaining that “the
Judiciary has a responsibility to decide cases properly before
it, even those it ‘would gladly avoid.’” Id. at 1427 (quoting
Cohens, 6 Wheat. at 404).
And just last year, in Lexmark International, Inc. v.
Static Control Components, Inc., 134 S. Ct. 1377 (2014), the
Court confirmed its disapproval of doctrines that permit
courts to decline to decide claims on “prudential” rather than
statutory or constitutional grounds, admonishing that such
doctrines conflict with the Court’s “recent reaffirmation [in
Sprint Communications] of the principle that a federal court’s
obligation to hear and decide cases within its jurisdiction is
virtually unflagging.” Id. at 1386 (quoting Sprint Commc’ns,
134 S. Ct. at 591) (internal quotation marks omitted). After
concluding the plaintiff’s claim “present[ed] a case or
controversy that [was] properly within federal courts’ Article
III jurisdiction,” the Court refused to frame the question
before it, which was whether the plaintiff had a cause of
action under a federal statute, as a question of “prudential
standing” despite using that label in the past. Id. at 1386-87.
The Court reasoned:
We do not ask whether in our judgment
Congress should have authorized [the
7
plaintiff’s] suit, but whether Congress in fact
did so. Just as a court cannot apply its
independent policy judgment to recognize a
cause of action that Congress has denied, it
cannot limit a cause of action that Congress has
created merely because “prudence” dictates.
Id. at 1388 (citation omitted).
These recent decisions counsel that equitable mootness
is not a logical extension of the narrow abstention doctrines
recognized by the Court and will not be viewed favorably as a
relatively new prudential one. See New Orleans Pub. Serv.,
Inc. v. Council of City of New Orleans, 491 U.S. 350, 358
(1989) [hereinafter “NOPSI”] (explaining that the Court’s
cases “have long supported the proposition that federal courts
lack the authority to abstain from the exercise of jurisdiction
that has been conferred”). Rather, this judge-made doctrine
can survive only if grounded in the Bankruptcy Code or the
federal statutes conferring bankruptcy jurisdiction—the
subject to which we now turn.
III.
A.
The majority opinion in Continental Airlines did not
engage with any statutory arguments in favor of equitable
mootness because none were raised. A review of the
statutory language, however, reveals that the Bankruptcy
Code and related jurisdictional statutes provide no support for
equitable mootness and actually undermine it.
8
Title 28 outlines federal courts’ bankruptcy
jurisdiction. Section 1334 gives district courts original
jurisdiction over bankruptcy cases, while § 157 allows them
to refer cases to bankruptcy courts. 28 U.S.C. §§ 157(a),
1334(a). The statute explicitly makes the bankruptcy court’s
authority to enter orders, including confirmation orders,
“subject to review” by the referring district court. Id. §
157(b)(1). In turn, § 158 provides that the district courts
“shall have jurisdiction to hear appeals” from bankruptcy
courts. Id. § 158(a). Neither § 157 nor § 158 states or
implies that district courts may decline to exercise that
jurisdiction by dismissing an appeal as equitably moot.
Appellees point to § 1334(c)(1), which provides that
“nothing in this section prevents a district court in the interest
of justice, or in the interest of comity with State courts or
respect for State law, from abstaining from hearing a
particular proceeding arising under title 11 or arising in or
related to a case under title 11.” Id. § 1334(c)(1). That
provision, however, provides no support for equitable
mootness. To begin, § 1334 cannot be read to authorize
district courts to abstain from exercising their appellate
jurisdiction when it refers to the original jurisdiction of the
district courts, not to appellate jurisdiction at all. See id. §
1334(a); In re Mystic Tank Lines Corp., 544 F.3d 524, 528
(3d Cir. 2008).
Moreover, § 1334 allows abstention “in the interest of
justice, or in the interest of comity with State courts or respect
for State law.” Equitable mootness no doubt does not involve
the latter. As to the former, it could be argued that preserving
a reorganization plan may serve the “interest of justice.” But
how is it “just” to bar a potentially meritorious appeal when
an appellate court—after hearing the merits of the appeal—
9
instead could use its equitable authority to fashion a limited
remedy while still protecting third parties that may be harmed
if a plan is undone? See Semcrude, 728 F.3d at 324-25 (citing
Cont’l Airlines, 91 F.3d at 571-72 (Alito, J., dissenting))
(“[T]he feared consequences of a successful appeal are often
more appropriately dealt with by fashioning limited relief at
the remedial stage than by refusing to hear the merits of an
appeal at its outset.”); see also NOPSI, 491 U.S. at 358-59
(noting that while federal courts “lack the authority to abstain
from the exercise of jurisdiction that has been conferred,”
they retain “discretion in determining whether to grant certain
types of relief”).
Additionally, if § 1334(c) were the basis for equitable
mootness, our construction of the doctrine (and every other
Circuit’s) would violate § 1334(d), which provides: “Any
decision to abstain or not to abstain made under subsection
(c) . . . is not reviewable by appeal or otherwise by the court
of appeals under section 158(d), 1291, or 1292 of this title or
by the Supreme Court of the United States under section 1254
of this title.” 28 U.S.C. § 1334(d) (emphasis added).6 Yet we
have never interpreted § 1334 to bar our review of district
court orders dismissing bankruptcy appeals on equitable
mootness grounds. On the contrary, dating back to
Continental Airlines, we have not only reviewed such
decisions, but have often reversed them. Thus, interpreting §
1334(c) as the statutory basis for equitable mootness would
6
Section 1334(d) operates much like § 1447(d), which
precludes review of orders remanding removed cases to state
court. See 28 U.S.C. § 1447(d) (“An order remanding a case
to the State court from which it was removed is not
reviewable on appeal or otherwise . . . .”).
10
be incompatible with our case law, as well as the language
and structure of § 1334.
Finally, the legislative history of § 1334(c) is devoid of
any mention of equitable mootness. It indicates the provision
was enacted to respond to the Supreme Court’s decision in
Northern Pipeline Construction Co. v. Marathon Pipe Line
Co., 458 U.S. 50 (1982), and to avoid constitutional concerns
with having state law claims resolved in federal courts. See
H.R. Rep. No. 98-882 (1984), reprinted in 1984
U.S.C.C.A.N. 576, 1984 WL 37391. The Supreme Court’s
interpretation of § 1334 in Stern v. Marshall, 131 S. Ct. 2594
(2011), reinforces that Congress’s intent was to authorize
bankruptcy courts to abstain from hearing state law claims in
certain circumstances—not to allow district courts to abdicate
their appellate jurisdiction:
[T]he framework Congress adopted in the 1984
Act . . . contemplates that certain state law
matters in bankruptcy cases will be resolved by
judges other than those of the bankruptcy
courts. Section 1334(c)(2), for example,
requires that bankruptcy courts abstain from
hearing specified non-core, state law claims that
“can be timely adjudicated[ ] in a State forum of
appropriate jurisdiction.” Section 1334(c)(1)
similarly provides that bankruptcy courts may
abstain from hearing any proceeding, including
core matters, “in the interest of comity with
State courts or respect for State law.”
Id. at 2619-20 (second alteration in original). Thus, the
language, structure, and legislative history of § 1334, as well
as its interpretation by the Supreme Court, indicate that
11
Congress did not intend an equitable mootness exception to
the federal courts’ appellate jurisdiction in bankruptcy cases.
Appellees urge that the “most plausible” basis for the
doctrine is that the Bankruptcy Code “express[es] a policy
favoring the finality of bankruptcy decisions” through 11
U.S.C. §§ 363(m),7 364(e),8 and 1127(b),9 and equitable
7
Section 363(m) provides: “The reversal or
modification on appeal of an authorization under subsection
(b) or (c) of this section of a sale or lease of property does not
affect the validity of a sale or lease under such authorization
to an entity that purchased or leased such property in good
faith, whether or not such entity knew of the pendency of the
appeal, unless such authorization and such sale or lease were
stayed pending appeal.” 11 U.S.C. § 363(m).
8
Section 364(e) provides: “The reversal or
modification on appeal of an authorization under this section
to obtain credit or incur debt, or of a grant under this section
of a priority or a lien, does not affect the validity of any debt
so incurred, or any priority or lien so granted, to an entity that
extended such credit in good faith, whether or not such entity
knew of the pendency of the appeal, unless such authorization
and the incurring of such debt, or the granting of such priority
or lien, were stayed pending appeal.” 11 U.S.C. § 364(e).
9
Section 1127(b) provides: “The proponent of a plan
or the reorganized debtor may modify such plan at any time
after confirmation of such plan and before substantial
consummation of such plan, but may not modify such plan so
that such plan as modified fails to meet the requirements of
sections 1122 and 1123 of this title. Such plan as modified
12
mootness fills a gap in the Code created by the absence of a
provision limiting appellate review of plan confirmation
orders. Semcrude, 728 F.3d at 317-18. But then-Judge Alito
aptly explained why we should reject this argument in his
Continental Airlines dissent: “[N]arrow provisions” such as
§§ 363(m) and 364(e), “which merely prevent the upsetting of
certain specific transactions if stays are not obtained,” cannot
support the broad doctrine of equitable mootness. 91 F.3d at
570 (Alito, J., dissenting) (emphasis added). By their terms,
§§ 363(m) and 364(e) do not prevent an appellate court from
hearing an appeal, or even from granting a particular remedy;
they simply prevent the appellate court’s remedy from
affecting certain transactions. See Krebs Chrysler-Plymouth,
Inc. v. Valley Motors, Inc., 141 F.3d 490, 499 (3d Cir. 1998).
Section 1127(b) provides even less support for equitable
mootness, as it only restricts a party’s ability to modify a plan
before confirmation; it says nothing about the powers of
bankruptcy courts or appellate courts.
Moreover, rather than establish a general “policy”
supporting equitable mootness, these provisions weigh
against the doctrine. Because Congress specified certain
orders that cannot be disturbed on appeal absent a stay, basic
canons of statutory construction compel us to presume that
Congress did not intend for other orders to be immune from
appeal. See Russello v. United States, 464 U.S. 16, 23 (1983);
Andrus v. Glover Const. Co., 446 U.S. 608, 616-17 (1980).
While the federal courts must fill statutory gaps in some
under this subsection becomes the plan only if circumstances
warrant such modification and the court, after notice and a
hearing, confirms such plan as modified, under section 1129
of this title.” 11 U.S.C. § 1127(b).
13
exceptional circumstances, see, e.g., United States v. Little
Lake Misere Land Co., 412 U.S. 580, 593 (1973), we may not
stretch a statute to create such gaps, and we generally
acknowledge gaps to provide relief, not to deny relief which
is the consequence of denying appellate review.
14
B.
Even if there were a reading of the statute that
supported equitable mootness, we would be compelled to
reject it because of the serious constitutional questions that
reading would raise. See Edward J. DeBartolo Corp. v. Fla.
Gulf Coast Bldg. & Constr. Trades Council, 485 U.S. 568,
575 (1988); Sandoval v. Reno, 166 F.3d 225, 237 (3d Cir.
1999).
Article III of the Constitution imposes certain
requirements on officials who exercise the judicial power of
the United States, U.S. Const. art. III § 1, but Congress often
charges officials who are not required to meet those criteria
with ruling on certain kinds of claims. Adjudication by such
non-Article III tribunals, including bankruptcy courts, raises
two distinct constitutional concerns. The first is the
infringement on a litigant’s “entitlement to an Article III
adjudicator,” a personal right recently reaffirmed in Wellness
International Network, Ltd. v. Sharif, 135 S. Ct. 1932, 1944
(2015). While that right can be waived, id., bankruptcy
appellants whose appeals are dismissed as equitably moot
clearly do not do so. Moreover, because they lack an
alternative forum in which to pursue their claims against a
debtor, most creditors do not truly consent to bankruptcy
adjudication in the first place, see Stern, 131 S. Ct. at 2614,
let alone adjudication without any appellate review.
The second is a non-waivable, structural concern that a
“congressional decision to authorize the adjudication of
Article III business in a non-Article III tribunal” would
“impermissibly threaten[] the institutional integrity of the
Judicial Branch.” Commodity Futures Trading Comm’n v.
15
Schor, 478 U.S. 833, 851 (1986); see Wellness Int’l, 135 S.
Ct. at 1944. In determining whether such an intrusion occurs,
the Court scrutinizes among other things “the extent to which
the ‘essential attributes of judicial power’ are reserved to
Article III courts.” Schor, 478 U.S. at 851. Appellate review
by an Article III judge is crucial to that determination. See,
e.g., id. at 853.10
Accordingly, over eighty years ago in Crowell v.
Benson, 285 U.S. 22 (1932), the Supreme Court upheld a
system of adjudication by an administrative agency on the
rationale that “the reservation of full authority to [an Article
III] court to deal with matters of law provide[d] for the
appropriate exercise of the judicial function.” Id. at 54. The
availability of Article III review was also essential to the
Court’s approvals of agency adjudications in Thomas v.
Union Carbide Agricultural Products Co., 473 U.S. 568, 593
(1985), and Commodity Futures Trading Commission v.
Schor, 478 U.S. 833, 853 (1986). Similarly, in United States
v. Raddatz, 447 U.S. 667 (1980), the Court upheld decision-
making by magistrate judges only because “the ultimate
decision is made by the district court.” Id. at 683; see also
Northern Pipeline, 458 U.S. at 83 (“Critical to the Court’s
decision to uphold the Magistrates Act was the fact that the
ultimate decision was made by the district court.”).
10
One prominent commentator has argued that review
by an Article III judge is both necessary and sufficient to
uphold adjudication by any non-Article III judge. See
Richard H. Fallon, Jr., Of Legislative Courts, Administrative
Agencies, and Article III, 101 Harv. L. Rev. 915, 916 (1988).
16
Applying these principles in the bankruptcy context,
the Supreme Court held in Northern Pipeline and Stern that
because a bankruptcy court is not an Article III court, it may
not enter final judgments regarding certain kinds of claims
(which have since been dubbed “Stern claims”) even when
the bankruptcy judge’s decision will be reviewed on appeal
by an Article III judge. See Stern, 131 S. Ct. at 2620;
Northern Pipeline, 458 U.S. at 86-87 (plurality opinion); see
also id. at 91 (Rehnquist, J., concurring in the judgment).
Most recently, in Wellness International, the Court approved
adjudication of Stern claims by bankruptcy judges where the
parties consent, but explicitly premised its decision on the
existence of appellate review by Article III courts, reasoning
that “allowing Article I adjudicators to decide claims
submitted to them by consent does not offend the separation
of powers so long as Article III courts retain supervisory
authority over the process.” 135 S. Ct. at 1944 (emphasis
added).
Equitable mootness drastically weakens that
supervisory authority, and therefore threatens a far greater
“impermissibl[e] intru[sion] on the province of the judiciary,”
Schor, 478 U.S. at 851-52, than the Court confronted in
Northern Pipeline, Stern, or Wellness International. The
doctrine not only prevents appellate review of a non-Article
III judge’s decision; it effectively delegates the power to
prevent that review to the very non-Article III tribunal whose
decision is at issue. Although Article III judges decide
whether an appeal is equitably moot, bankruptcy courts
control nearly all of the variables in the equation, including
whether a reorganization plan is initially approved, whether a
stay of plan implementation is granted, whether settlements or
releases crucial to a plan are approved and executed, whether
17
property is transferred, whether new entities (in which third
parties may invest) are formed, and whether distributions
(including to third parties) under the plan begin—all before
plan challengers reach an Article III court.
Put another way, whereas magistrate judges’ and
administrative agencies’ decisions are at least subject to
appellate review, equitable mootness not only allows
bankruptcy court decisions to avoid review, but also enables
bankruptcy judges to insulate their decisions from review at
their discretion. In turn, opportunistic plan proponents can
(and as discussed below, regularly do) use this to their
advantage. As then-Judge Alito warned in Nordhoff
Investments, “our court’s equitable mootness doctrine can
easily be used as a weapon to prevent any appellate review of
bankruptcy court orders confirming reorganization plans. It
thus places far too much power in the hands of bankruptcy
judges.” 258 F.3d at 192 (Alito, J., concurring in the
judgment).
While historical precedent can justify a delegation of
judicial power to a non-Article III tribunal,11 equitable
11
See Northern Pipeline, 458 U.S. at 70 (plurality
opinion) (“In sum, this Court has identified three situations in
which Art. III does not bar the creation of legislative courts.
In each of these situations, the Court has recognized certain
exceptional powers bestowed upon Congress by the
Constitution or by historical consensus. Only in the face of
such an exceptional grant of power has the Court declined to
hold the authority of Congress subject to the general
prescriptions of Art. III.”); see also Stern, 131 S. Ct. at 2621
(Scalia, J., concurring) (citing Thomas E. Plank, Why
Bankruptcy Judges Need Not and Should Not Be Article III
18
mootness cannot lay claim to such historical support. Despite
the doctrine’s recent acceptance by district courts and courts
of appeals, the decisions of bankruptcy commissioners,
referees, and, most recently, judges have always been subject
to review in courts of law or equity.12 Abdicating that review
is a modern trend not started by Congress or the Supreme
Court.
At the very least, equitable mootness raises serious
constitutional concerns by failing to provide appellate review
of bankruptcy judges’ decisions in an Article III court—a
protection that was present, yet ultimately insufficient to cure
similar concerns in Northern Pipeline and Stern. With no
indication that Congress or the Supreme Court has authorized
an exception to our “virtually unflagging obligation” to
exercise our jurisdiction that supports equitable mootness, it
is not hard to see why the six dissenting members of our
Court in Continental Airlines were “puzzled and troubled” by
our adoption of the doctrine without any analysis of its
origins. 91 F.3d at 568 (Alito, J., dissenting).
IV.
Beyond the issues with equitable mootness’s
legitimacy, I also question its efficacy. The doctrine was
intended to promote finality, but it has proven far more likely
to promote uncertainty and delay. Ironically, as Chief Judge
Judges, 72 Am. Bankr. L.J. 567, 607-09 (1998)) (positing that
“[p]erhaps historical practice permits non-Article III judges to
process claims against the bankruptcy estate,” but declining to
reach the issue).
12
See Plank, supra note 11, at 574.
19
McKee noted at oral argument in this case, a motion to
dismiss an appeal as equitably moot has become “part of the
Plan.”13 Proponents of reorganization plans now rush to
implement them so they may avail themselves of an equitable
mootness defense, much like Appellees did here.14 Rather
than litigate the merits of an appeal, parties then litigate
equitable mootness. And even if an appeal is dismissed as
equitably moot by a district court, that dismissal is appealed
to our Court, often resulting, in turn, in a remand and further
proceedings.
13
Oral Argument at 48:05-49:35, available at
http://www.ca3.uscourts.gov/oral-argument-recordings.
14
Appellees closed the transactions contemplated by
the Plan and began distributions under the Plan the day the
Plan took effect, March 21, 2013. App. 1522. Even before
that, however, Appellees advised the District Court that they
intended to move to dismiss Quad’s appeal as equitably moot,
specifically, two days before the Plan took effect during a
hearing on Quad’s emergency motion for a stay pending
appeal. App. 1519; see also Oral Argument at 48:05-48:40,
available at http://www.ca3.uscourts.gov/oral-argument-
recordings. One month later, Appellees again argued the
appeal was equitably moot during a hearing on Quad’s
preliminary injunction motion, which was before the appeal
had been briefed. App. 3226. This is the same kind of
opportunistic conduct that worried then-Judge Alito in
Nordhoff Investments. See 258 F.3d at 191 (Alito, J.,
concurring in the judgment) (“It is disturbing that Zenith, in a
seeming attempt to moot any appeal prior to filing, succeeded
in implementing most of the plan before the appellants even
received notice that the plan had been confirmed.”).
20
This appeal proves the point. The Bankruptcy Court
approved the Plan on March 5, 2013. Quad then made
multiple unsuccessful attempts to obtain a stay from the
Bankruptcy Court and the District Court, eventually filing its
brief on appeal in the District Court on May 23, about two
months after the Plan took effect. One2One filed its brief in
response about two weeks later, and then filed its motion to
dismiss the appeal as equitably moot the next day. All of the
briefing on both the merits and the motion to dismiss was
complete by June 25, 2013. Because the appeal was
dismissed on equitable mootness grounds, however, we find
ourselves, nearly two years later and after the parties have
expended considerable resources on full briefing and
argument before this Court, concluding that the District Court
improperly applied the equitable mootness factors and
remanding for a ruling on the merits—a ruling that itself
eventually may be appealed.
How, then, does refusing to hear the merits of the
appeal achieve finality? Even if we were affirming the
District Court’s finding of equitable mootness, there would
not have been finality until this point, as the possibility of
reversal has loomed all along. Without the equitable
mootness doctrine, on the other hand, the District Court
would have ruled on the merits long ago.
Even if the doctrine worked as intended and
consistently promoted finality, its deleterious effect on our
system of bankruptcy adjudication presents an independent
reason to reject it. By excising appellate review, equitable
mootness not only tends to insulate errors by bankruptcy
judges or district courts, but also stunts the development of
21
uniformity in the law of bankruptcy.15 Moreover, the
significant consequences of a confirmation order, as recently
recited by the Supreme Court, necessitate appellate review:
[P]lan confirmation . . . alters the status quo and
fixes the rights and obligations of the parties.
When the bankruptcy court confirms a plan, its
terms become binding on debtor and creditor
alike. Confirmation has preclusive effect,
foreclosing relitigation of any issue actually
litigated by the parties and any issue necessarily
determined by the confirmation order. Subject
to certain exceptions, confirmation vests all of
the property of the bankruptcy estate in the
debtor, and renders that property free and clear
of any claim or interest of any creditor provided
for by the plan. Confirmation also triggers the
Chapter 13 trustee’s duty to distribute to
creditors those funds already received from the
debtor.
15
Indeed, the desire for clarity and uniformity led
Congress to enact 28 U.S.C. § 158(d)(2), the “new statutory
provision for certification of bankruptcy appeals directly to
the courts of appeals.” See In re Pac. Lumber Co., 584 F.3d
229, 241 (5th Cir. 2009). “The twin purposes of the provision
were to expedite appeals in significant cases and to generate
binding appellate precedent in bankruptcy, whose caselaw has
been plagued by indeterminacy.” Id. at 241-42 (citing H.R.
Rep. No. 109-31 pt. I, at 148 (2005), as reprinted in 2005
U.C.C.C.A.N. 88, 206)).
22
Bullard v. Blue Hills Bank, 135 S. Ct. 1686, 1692 (2015)
(alterations, citations, and internal quotation marks omitted).
Particularly troubling are dismissals of appeals
challenging plans that “classify similar claims differently in
order to gerrymander an affirmative vote on reorganization.”
In re Pac. Lumber Co., 584 F.3d 229, 251 (5th Cir. 2009)
(quoting In re Greystone III Joint Venture, 995 F.2d 1274,
1279 (5th Cir. 1991)) (internal quotation mark omitted).
Even if appellants challenging such violations can
demonstrate “apparent arbitrariness” in the treatment of
different creditors, courts are likely to find their appeals
equitably moot, as often “no remedy . . . is practicable other
than unwinding the plan.” Id.; accord In re Charter
Commc’ns 691 F.3d 476, 487-88 (2d Cir. 2012). Under such
circumstances, equitable mootness merely serves as part of a
blueprint for implementing a questionable plan that favors
certain creditors over others without oversight by Article III
judges.16 In short, even equitable and prudential concerns
weigh against equitable mootness.
16
See Brief of Bankruptcy Law Professors in Support
of Granting the Petition for Certiorari at 5, Law Debenture
Trust Co. of N.Y. v. Charter Commc’ns, Inc., 133 S. Ct. 2021
(2013) (No. 12-847), 2013 WL 543337 [hereinafter “Brief of
Bankruptcy Law Professors”] (“[S]ophisticated parties have
learned that a ‘pre-packaged’ reorganization plan that is
designed to be consummated over a weekend may be
insulated from review by an Article III court even though the
plan contains terms that would be determined to be unlawful
if the plan were subjected to judicial review, and those parties
are increasingly exploiting that opportunity.”); Ryan M.
Murphy, Equitable Mootness Should Be Used as a Scalpel
23
V.
We must consider whether to end or endure the
mischief of equitable mootness. Although the doctrine has
been accepted de facto across the Circuits, its legitimacy has
rarely been scrutinized,17 and this appeal appears to be the
first in our Circuit in which an appellant has properly
preserved and disputed the validity of equitable mootness
under the Bankruptcy Code, the federal statutes conferring
bankruptcy jurisdiction, and the Constitution. In fact, aside
from numerous petitions for certiorari, the doctrine has gone
virtually unchallenged.18 This may be because litigants—and
Rather than an Axe in Bankruptcy Appeals, 19 J. Bankr. L. &
Prac. 1 Art. 2 (2010) (“[T]he importance of substantial
consummation in rendering a claim equitably moot raises
concerns that a debtor can ‘stack the deck’ in its favor to
expedite implementation of its plan and foreclose review of
questionable plan components.”).
17
See Semcrude, 728 F.3d at 317 (“Courts have rarely
analyzed the source of their authority to refuse to hear an
appeal on equitable mootness grounds.”); Murphy, supra note
16 (“In light of the analysis provided by the dissent in
Continental Airlines and the scarcity of opinions that tackle
the question of the origin of equitable mootness, it is difficult
to discern a coherent underlying rationale that justifies such a
radical concept.” (footnote omitted)).
18
It is therefore not surprising that the Supreme Court
has denied those petitions, as the courts of appeals have rarely
grappled with the doctrine’s constitutional and statutory
24
bankruptcy attorneys—wield the weapon of equitable
mootness just as often as they suffer its blows. But it is time
for the challenge, and I am not alone in urging it. A coalition
of bankruptcy law professors and the United States
Government have both urged the Supreme Court to hear
challenges to equitable mootness.19 In any event, the
doctrine’s widespread acceptance, standing alone, does not
establish its validity. After all, the system of bankruptcy
underpinnings. Regardless, there is no basis for Appellees’
contention that the Supreme Court’s denial of certiorari
reflects the Court’s tacit approval of the equitable mootness
doctrine. As the Court “ha[s] often stated, the denial of a writ
of certiorari imports no expression of opinion upon the merits
of the case. The variety of considerations [that] underlie
denials of the writ counsels against according denials of
certiorari any precedential value.” Teague v. Lane, 489 U.S.
288, 296 (1989) (second alteration in original) (citations and
internal quotation marks omitted); accord United States ex
rel. Smith v. Baldi, 192 F.2d 540, 544 (3d Cir. 1951) (reciting
the “well established rule that a denial of certiorari does not
prove anything except that certiorari was denied”).
19
See Brief of Bankruptcy Law Professors, supra note
16, at 2; Petition for a Writ of Certiorari, United States v.
GWI PCS 1, Inc., 533 U.S. 964 (2001) (No. 00-1621), 2001
WL 34124814.
25
adjudication struck down in Stern had been unanimously
upheld by district courts and courts of appeals.20
Moreover, principles of stare decisis do not compel us
to continue on this course. “Revisiting precedent is
particularly appropriate where, as here, . . . the precedent
consists of a judge-made rule that was recently adopted to
improve the operation of the courts, and experience has
pointed up the precedent’s shortcomings,” Pearson v.
Callahan, 555 U.S. 223, 233 (2009), and where “subsequent
legal developments have unmoored the case from its doctrinal
anchors,” Morrow v. Balaski, 719 F.3d 160, 180 (3d Cir.
2013) (en banc) (Smith, J., concurring); see Dickerson v.
United States, 530 U.S. 428, 443 (2000) (“[W]e have
overruled our precedents when subsequent cases have
undermined their doctrinal underpinnings.”); see also Leegin
Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877,
900 (2007) (quoting Dickerson and collecting cases).
Considering that equitable mootness barely had doctrinal
anchors to begin with, our dismal experience with it obliges
us to reconsider Continental Airlines.
While proponents of the doctrine will emphasize its
practical importance to the administration of bankruptcy
estates, there are effective alternatives that do not suffer from
the prudential, statutory, and constitutional defects of
equitable mootness. For instance, in an appropriate case,
parties can deploy the equitable defense of laches, which
requires “establish[ing] (1) an inexcusable delay in bringing
20
See Brook E. Gotberg, Restructuring the Bankruptcy
System: A Strategic Response to Stern v. Marshall, 87 Am.
Bankr. L.J. 191, 205 & n.74 (2013).
26
the action and (2) prejudice.” In re Mushroom Transp. Co.,
382 F.3d 325, 337 (3d Cir. 2004) (quoting U.S. Fire Ins. Co.
v. Asbestospray, Inc., 182 F.3d 201, 208 (3d Cir. 1999))
(internal quotation mark omitted). Similarly, where an
appellant’s bad faith delay prejudices other parties, courts
have discretion to impose an appropriate remedy, including
dismissal. See In re Harris, 464 F.3d 263, 273 (2d Cir. 2006)
(Sotomayor, J.); In re SPR Corp., 45 F.3d 70, 74 (4th Cir.
1995); In re Comer, 716 F.2d 168, 177 (3d Cir. 1983); see
also Fed. R. Bankr. P. 8003(a)(2) (“An appellant’s failure to
take any step other than the timely filing of a notice of appeal
does not affect the validity of the appeal, but is ground only
for the district court or BAP to act as it considers appropriate,
including dismissing the appeal.”). And, of course, appellate
courts can expedite briefing schedules and issue orders with
necessary instructions for the parties and bankruptcy courts in
advance of full opinions.
More broadly, courts can address the concerns behind
equitable mootness, including the extent to which granting
requested relief will “fatally scramble” an otherwise lawful
plan or “significantly harm third parties who have justifiably
relied on the plan’s confirmation,” in fashioning an
appropriate remedy, rather than abstaining from exercising
their jurisdiction. Semcrude, 728 F.3d at 321; see also id. at
324-25 (citing Cont’l Airlines, 91 F.3d at 571-72 (Alito, J.,
dissenting)) (“As then-Judge Alito explained, the feared
consequences of a successful appeal are often more
appropriately dealt with by fashioning limited relief at the
remedial stage than by refusing to hear the merits of an appeal
at its outset.”).
In many cases, district courts may conclude that all or
substantially all of the relief requested is feasible despite the
27
plan’s consummation. See In re Res. Tech. Corp., 430 F.3d
884, 886-87 (7th Cir. 2005) (Easterbrook, J.) (“Unscrambling
a transaction may be difficult, but it can be done. No one (to
our knowledge) thinks that an antitrust or corporate-law
challenge to a merger becomes moot as soon as the deal is
consummated. Courts can and do order divestiture or
damages in such situations.”); In re Kmart Corp., 359 F.3d
866 (7th Cir. 2004) (Easterbrook, J.) (“Money had changed
hands and, we are told, cannot be refunded. But why not?
Reversing preferential transfers is an ordinary feature of
bankruptcy practice, often continuing under a confirmed plan
of reorganization.” (citation omitted)); Matter of Envirodyne
Indus., Inc., 29 F.3d 301, 304 (7th Cir. 1994) (Posner, J.)
(“We could order the bankruptcy judge to modify the plan of
reorganization to reallocate $20 million worth of the stock
that the 14% noteholders received to the appellants, the
13.5% noteholders. Some of the 14% noteholders, it is true,
have already sold their stock, but they could be ordered to
surrender some or all of the proceeds to the appellants.”).
In other cases, the interests of finality and protecting
third parties will weigh against granting an appellant’s
requested relief in its entirety. The availability of only
limited relief, however, should not prevent adjudication on
the merits. “[T]otal relief . . . is not essential to jurisdiction,”
as “relatively few plaintiffs get all they are seeking in their
lawsuit.” Envirodyne, 29 F.3d at 304. Even if a “bankruptcy
court might determine that full relief is no longer available to
[appellants] after substantial consummation,” certainly
appellants “would readily accept some fractional recovery
that does not impair feasibility or affect parties not before this
Court, rather than suffer the mootness of [their] appeal as a
whole.” In re Chateaugay Corp., 10 F.3d 944, 954 (2d Cir.
28
1993).
Accordingly, several courts have analyzed equitable
mootness only after addressing the merits, including the
Seventh Circuit in Envirodyne, a decision written by Judge
Posner. There, following Judge Easterbrook’s decision in In
re UNR Industries, Inc., 20 F.3d 766, 769 (7th Cir. 1994),
which banished the term “equitable mootness” from that
Circuit, the court reasoned that the “[t]he now nameless
doctrine is perhaps best described as merely an application of
the age-old principle that in formulating equitable relief a
court must consider the effects of the relief on innocent third
parties” and “not a jurisdictional doctrine.” Envirodyne, 29
F.3d at 304 (citing Int’l Brotherhood of Teamsters v. United
States, 431 U.S. 324, 375 (1977)). As such, the court
“elide[d] the question of [the doctrine’s] applicability” and
affirmed the bankruptcy appeal before it on the merits. Id.21
21
See also SEC v. Wealth Mgmt. LLC, 628 F.3d 323,
332 (7th Cir. 2010) (affirming on the merits rather than
analyzing equitable mootness); UNR, 20 F.3d at 770
(considering whether plan challengers had demonstrated a
“powerful reason” to alter a reorganization plan); cf. United
States v. Buchman, 646 F.3d 409, 411 (7th Cir. 2011)
(Easterbrook, C.J.) (“Circuits that use [the equitable
mootness] doctrine dismiss an appeal once a bankruptcy
auction has been completed or a plan of reorganization
confirmed and implemented without a stay. But this circuit
does not follow that approach. We have held that the
possibility of financial adjustments among the parties keeps a
proceeding alive even if the sale cannot be upset and rights
under a plan of reorganization cannot be revised.”); United
States v. Segal, 432 F.3d 767, 774 (7th Cir. 2005) (“[W]hile
29
At least two courts have followed Judge Posner’s lead.
In In re Metromedia Fiber Network, Inc., 416 F.3d 136 (2d
Cir. 2005), a Second Circuit panel analyzed the merits of an
appeal before equitable mootness, reasoning that “[b]ecause
equitable mootness bears only upon the proper remedy, and
does not raise a threshold question of our power to rule, a
court is not inhibited from considering the merits before
considering equitable mootness.” Id. at 144 (citing
Envirodyne, 29 F.3d at 303-04). The court further observed
that “[o]ften, an appraisal of the merits is essential to the
framing of an equitable remedy.” Id. And the Fourth Circuit,
in its most recent equitable mootness decision, cited
Metromedia in adopting the same approach. Behrmann v.
Nat’l Heritage Foundation, 663 F.3d 704, 713 n.3 (4th Cir.
2011).
Considering the equities after the merits, at the
remedial stage, offers several advantages over abstaining
from hearing the appeal altogether. In many cases, deciding
the merits of a bankruptcy appeal may require the same if not
less effort than deciding equitable mootness, especially given
that a bankruptcy judge’s findings of fact are reviewed for
clear error. If so, a court can conserve resources by ruling
first on the merits, as the court did in Envirodyne. See 29
F.3d at 304. If not, requiring a ruling on the merits can at
we are concerned about trying to unwind the settlement, it is
difficult to determine the precise effects of such an action . . .
. This prevents us from conclusively holding that the
settlement was so complex or that the changes after the
settlement have been so sweeping that it would be foolish for
us to even consider reversing the deal. Therefore, with some
reservations, we move on.”).
30
least prevent one cycle of appeals (as a ruling by the District
Court on the merits of Quad’s appeal might have obviated the
need for a remand here).22
Even in an exceptional case, like Continental Airlines,
where a court arguably cannot grant any relief without
inequitably harming innocent parties, having a decision on the
merits is beneficial. In Metromedia, for instance, the Second
Circuit determined that the bankruptcy court had improperly
approved certain nondebtor releases, but ultimately concluded
it would be inequitable to grant relief considering that the
appellants had not sought a stay and “none of the completed
transactions c[ould] be undone without violence to the overall
arrangements.” 416 F.3d at 144-45. Nevertheless, the court’s
decision on the merits has been cited numerous times by
courts analyzing similar provisions in reorganization plans.
See, e.g., In re Vitro S.A.B. de CV, 701 F.3d 1031, 1061 (5th
Cir. 2012) (relying on Metromedia in analyzing nondebtor
releases); In re Genco Shipping & Trading Ltd., 513 B.R.
233, 269 (Bankr. S.D.N.Y. 2014) (same). Thus, a ruling on
the merits of a bankruptcy appeal will promote accuracy and
uniformity in the law of bankruptcy even if the reviewing
court finds it impossible to fashion an appropriate remedy.
22
As a recent example, in In re Jevic Holding Corp., --
- F.3d ----, No. 14-1465, 2015 WL 2403443 (3d Cir. May 21,
2015), the district court there ruled on both the merits of the
appeal before it and equitable mootness. We did not address
equitable mootness, but rather affirmed on the merits. Had
the district court not ruled on the merits, we might have had
to remand for further proceedings. See id. at *9; see also id.
at *11 (Scirica, J., concurring in part and dissenting in part)
(agreeing that equitable mootness did not apply).
31
Such cases should be exceedingly rare, however,
because as long as any remedy, including monetary relief, is
available, an appellant’s claims are “not ‘moot’ in any proper
sense of the term,” Cont’l Airlines, 91 F.3d at 568 (Alito, J.,
dissenting), and should be heard on their merits. See Parents
Involved in Cmty. Sch. v. Seattle Sch. Dist. No. 1, 551 U.S.
701, 720 (2007) (reasoning that a case is not moot where a
plaintiff seeks monetary relief in their complaint); Church of
Scientology v. United States, 506 U.S. 9, 12 (1992)
(explaining that a case is not moot where, although “a court
may not be able to return the parties to the status quo ante,” it
“can fashion some form of meaningful relief”); see also 13C
Charles Alan Wright et al., Federal Practice & Procedure §
3533.3 (3d ed. 2015) (“Untold numbers of cases illustrate the
rule that a claim for money damages is not moot . . . .”).
32
VI.
Even if we decide not to revisit equitable mootness, we
should delineate its contours more precisely and provide
clearer guidance to the district courts on its appropriate use.
We made valiant efforts in Semcrude, where we placed the
burden of demonstrating equitable mootness on the party
seeking dismissal, emphasized that speculative “Chicken
Little” statements prophesizing harm to a plan or to third
parties cannot fulfill that burden, and stressed that “[t]he
presumptive position remains that federal courts should hear
and decide on the merits cases properly before them.” 728
F.3d at 321-22, 324-26. But the persistent problems in the
doctrine’s application by district courts reflect that more must
be done, and there are at least four reforms we could consider
if we opted to maintain equitable mootness as an abstention
doctrine.
First, we could place greater weight on an appellant’s
attempts to obtain a stay, perhaps permitting dismissal only
where an appellant does not seek one.23 In such cases, we can
fairly say “the appealing party should have acted before the
plan became extremely difficult to retract.” Nordhoff Invs.,
258 F.3d at 185 (majority opinion). Indeed, every time we
23
The inequity of granting relief where an appellant
has been less than diligent in obtaining a stay motivated the
earliest equitable mootness decisions. See, e.g., In re Roberts
Farms, Inc., 652 F.2d 793, 798 (9th Cir. 1981). More recent
decisions from other Circuits have also placed great weight
on a failure to seek a stay. See, e.g., In re Thorpe Insulation
Co., 677 F.3d 869, 881 (9th Cir. 2012); In re Paige, 584 F.3d
1327, 1341 (10th Cir. 2009); Metromedia, 416 F.3d at 144.
33
have affirmed a finding of equitable mootness after
Continental Airlines, the appellant failed to file a motion for a
stay. See In re SemCrude L.P., 456 F. App’x 167, 171 (3d
Cir. 2012) (not precedential) (appellant made an oral motion
for a stay in the bankruptcy court, but never filed a written
motion or made any other attempts to obtain a stay); In re
Genesis Health Ventures, Inc., 204 F. App’x 144, 146 (3d
Cir. 2006) (not precedential) (appellant made no attempt to
obtain a stay); In re SGPA, Inc., 34 F. App’x 49, 52 (3d Cir.
2002) (not precedential) (same); Nordhoff Invs., 258 F.3d at
185 (same); see also id. at 191-92 (Alito, J., concurring in the
judgment) (agreeing that an appeal was equitably moot
“primarily” because the appellants had failed to seek a stay).
Second, we could clarify what constitutes
“significant[] harm” to “third parties who have justifiably
relied on plan confirmation.” Semcrude, 728 F.3d at 321.
Specifically, who is a “third party,” and when is their reliance
“justifiable”? While we should be hesitant to grant relief
where the effects on third parties would be inequitable, we
may be less concerned where purported third parties have had
the opportunity to participate in the bankruptcy proceedings
or on appeal. Just as opponents of a reorganization plan must
diligently pursue their claims, so must plan proponents. See
Charter Commc’ns, 691 F.3d at 484 (“[T]he relief
[Appellants] seek would not adversely affect parties without
an opportunity to participate in the appeal . . . . Even
assuming that the relief requested would send Charter back
into bankruptcy, the parties most affected . . . are either
parties to this appeal or participated actively in the
bankruptcy proceedings.” (emphasis added) (citation
omitted)); Paige, 584 F.3d at 1344 (“[B]ecause of
ConsumerInfo’s pivotal role in the bankruptcy proceedings, it
34
is hard to consider it a ‘third party’ or at least an innocent
third party.”).
And we should be even less solicitous of parties who
act opportunistically or advocate unlawful plan provisions
during confirmation. See Charter Commc’ns, 691 F.3d at 484
(“[I]f the Allen Settlement were unlawful, it would not be
inequitable to require the parties to that agreement to disgorge
their ill-gotten gains, participation in the appeal or not.”);
Paige, 584 F.3d at 1343 (“[W]here . . . the parties attempting
to convince the court not to reach the merits have accelerated
the consummation of the plan despite their knowledge of a
pending appeal . . . we are less inclined to grant their wish
that the court abstain from reaching the merits on appeal.”);
Pac. Lumber Co., 584 F.3d at 244 (“That there might be
adverse consequences to MRC/Marathon is not only a natural
result of any ordinary appeal—one side goes away
disappointed—but adverse appellate consequences were
foreseeable to them as sophisticated investors who opted to
press the limits of bankruptcy confirmation and valuation
rules.”); id. at 244 n.19 (“Equitable mootness should protect
legitimate expectation of parties to bankruptcy cases but
should not be a shield for sharp or unauthorized practices.”).
Third, we could reconsider our standard of review of
determinations of equitable mootness. While we opted for
abuse of discretion review in Continental Airlines, several
Circuits apply de novo review instead. See In re United
Producers, Inc., 526 F.3d 942, 946 (6th Cir. 2007); In re GWI
PCS 1 Inc., 230 F.3d 788, 799-800 (5th Cir. 2000); In re
Baker & Drake, Inc., 35 F.3d 1348, 1351 (9th Cir. 1994); In
35
re Club Assocs., 956 F.2d 1065, 1069 (11th Cir. 1992).24 The
Continental Airlines dissent argued that we chose the wrong
side of this split, as “there is an unbroken and well-
established line of authority from this court holding that
‘[b]ecause the district court sits as an appellate court in
bankruptcy cases, our review of the district court’s decision is
plenary.’” 91 F.3d at 568 n.4 (Alito, J., dissenting) (alteration
in original) (quoting In re Visual Indus., Inc., 57 F.3d 321,
324 (3d Cir. 1995)). Then-Judge Alito added that de novo
review is appropriate because “[w]e are essentially called on
to review whether the district court properly decided not to
reach the merits of [an] appeal,” and “[w]e are in just as good
a position to make this determination as [a] district court.” Id.
Further, equitable mootness is intended to be “limited in
scope and cautiously applied,” and “plenary review would
better serve th[o]se ends.” Id. (internal quotation marks
omitted). Then-Judge Alito repeated his criticisms in his
Nordhoff Investments opinion, see 258 F.3d at 192, and we
echoed his concerns in Semcrude, see 728 F.3d at 320 n.6
(“We are inclined to agree with this criticism, but nonetheless
are bound to review for abuse of discretion.”). Our repeated
reversals of district courts’ equitable mootness decisions
indicate a more stringent standard of review would be a
helpful reform.
24
Of course, the fact “[t]hat the courts are creating a
doctrine unmoored to the Code is illustrated by their
divergence concerning the appropriate test for equitable
mootness.” Brief of Bankruptcy Law Professors, supra note
16, at 11 & n.3 (citing Phila. Newspapers, 690 F.3d at 168-
69; In re Paige, 584 F.3d 1327, 1338-39 (10th Cir. 2009)).
36
Finally, we could incorporate into our equitable
mootness test “a quick look at the merits of [an] appellant’s
challenge” to determine if it is “legally meritorious or
equitably compelling.” Paige, 584 F.3d at 1339. While no
substitute for full consideration on the merits that could
provide guidance for future courts and litigants, a brief look at
the merits of an appeal and the importance of the issues raised
is better than none. See In re Stephens, 704 F.3d 1279, 1283
(10th Cir. 2013) (observing that until a novel legal question at
issue on appeal was resolved, “debtors and creditors in every
individual Chapter 11 case must anticipate the possibility of
the expense and delay associated with litigation over this
issue”). Merits review is particularly important for complex
questions, like whether a plan comports with the Bankruptcy
Code’s cram down provisions, an issue that “often cries out
for appellate review,” Pac. Lumber Co., 584 F.3d at 244, or
claims involving conflicts of interest or preferential treatment
that “go to the very integrity of the bankruptcy process,”
Paige, 584 F.3d at 1348; see also Pac. Lumber Co., 584 F.3d
at 251 (quoting In re Hilal, 534 F.3d 498, 500 (5th Cir.
2008)) (“[E]quity strongly supports appellate review of issues
consequential to the integrity and transparency of the Chapter
11 process.” (alteration in original) (internal quotation marks
omitted)). Further, even a preliminary consideration of the
merits can guide the court’s assessment of the effects of
granting different forms of relief. See Metromedia, 416 F.3d
at 144 (“Often, an appraisal of the merits is essential to the
framing of an equitable remedy.”).
What we should not do is ignore the serious problems
with equitable mootness that are squarely and properly raised
by this appeal. Indeed, waiting to resolve the questions
surrounding the doctrine will only lead other parties and
37
district courts, like those in this case, to waste resources
litigating equitable mootness. In sum, while I agree with the
majority’s application of the precedent that binds our panel,
that precedent is ripe for reconsideration, and we should
revisit or at least reform the equitable mootness doctrine.
38